Absurdities of the Non-Profit Laws

The Colorado Freedom Report:  A libertarian journal of politics and culture.

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Absurdities of the Non-Profit Laws

Why The Colorado Freedom Report is For-Profit

by Ari Armstrong

The Constitution says that the government can't abridge the freedom of speech in America. But it sure can tax the heck out of it. The Colorado Freedom Report is a for-profit business, and as its owner I am legally obligated to pay taxes on revenues earned by it. But why should there even be a legal distinction between for-profit and non-profit organizations?

I decided to keep CFR for-profit mainly to avoid the restrictions placed on non-profits. CFR is a political journal in which I want to cover, and evaluate, particular pieces of legislation and particular politicians. Federal law restricts a non-profit organization's right to speak freely on political matters. The main section of relevant law defines a set of organizations which may be classified non-profit as:

US Code 501(C)(3) Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.

The 501(C)(3) tax law has pernicious effects on non-profit organizations, which must employ legalistic deception to comply with the law. For instance, Focus on the Family, the conservative Christian group in Colorado Springs recently accused of violating the rules for non-profits, is required to say things along the lines of, "Candidate X is a terrible, horrible person, but we're not suggesting you vote one way or another in the election." That a Christian organization rides a lie through a legal loophole is an ironic but natural consequence of US social engineering.

Other examples abound. The Independence Institute of Golden regularly puts out op/eds critical of big government, but it always includes a disclaimer saying that the work is not meant to influence particular laws or elections. Such practices encourage compartmentalized thinking. Does it really make any sense to hold a strictly negative view of a political candidate, but then not let that view influence one's vote?

I assure the reader that when I, writing for The Colorado Freedom Report, say that a particular candidate or law is inimical to liberty, I mean that you should darn well vote against that person or law. I'm not going to play the ridiculous con game inherent in non-profit status.

One possible reform would be simply to forbid all non-profits from dealing with politics in any way. However, this would bar nearly every organization from non-profit status. Politics is not an isolated event separated from the general culture. Every element of culture may be affected by politics, and vice versa; thus, nearly all organizations will frequently make implicit or explicit policy recommendations. (There are other types of "non-profits" that can advocate policies, but these groups don't get nearly the tax benefits of the 501(C)(3) groups, so I'll leave discussion of them aside.)

Another option would allow educational groups to discuss politics openly. But this raises fundamental issues of fairness. Why should the tax code penalize a manufacturing business more than a journal of political advocacy? I don't think it should penalize either one. I favor a radical proposal: eliminate the legal distinction between for-profits and non-profits.

A computer chip manufacturer exists to serve human needs as much as a charitable organization does. Both groups have "customers," people who pay for particular goods or services. The State should stop its social engineering, its encouragement of some activities over others. So long as the income tax exists, it should at least disallow deductions and unbalanced taxation.

The only possible justification for using the tax code to penalize some activities less than others is the "free rider problem." That is, with many charities, society as a whole benefits from the contributions of a few. For instance, a well-run charity might help the homeless find jobs and accommodations, which would benefit everyone even though not everyone paid. To help overcome the free rider problem, in which people are tempted to reap the benefits without paying for them, the tax code can lesson the pain of charitable giving.

However, the free rider argument faces a fundamental problem: who decides what is beneficial to society and what isn't? Objectivists will argue that Christianity is destructive; loggers will argue that much environmentalism is destructive; most of us will argue that neo-nazi groups are destructive. If the tax law is going to favor some charitable causes, it shouldn't discriminate against others, even (or especially) those involved with political advocacy.

But why stop there? Many businesses provide benefits to society as a whole. Microsoft, by creating a widely used computer standard, has contributed to a general increase in productivity for which it has not been wholly compensated by its customers. Perhaps there should be a Microsoft tax deduction. Many for-profit businesses provide more to free riders than some non-profits provide. Sorting this mess out is practically impossible, ensuring that any discriminatory tax will be unfair.

By the way, an organization's status as "non-profit" or "for-profit" is no indication of how much profit the group actually makes. Non-profits, which in many cases serve no obvious charitable function, frequently make huge amounts of money, much of which goes to pay high salaries and otherwise dodge the supposed restrictions of the 501(C)(3) code. Many for-profits, on the other hand, such as CFR, barely scrape by financially. (This journal probably never will be a big money maker and is largely charitable in its function.) The common distinction, then, is misleading at best. A better categorization would be, "taxed" and "non-taxed."

To be sure, taxes should not penalize the operation of charitable and educational organizations. But neither should they penalize the operation of any business. The answer is not to pass discriminatory taxes that harm some groups more than others, but simply to repeal the taxes altogether.

Note: Everything in this publication is intended to aid or hinder the passage of legislation before the Federal Congress and the Colorado legislature.

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